Farmland is valuable, but buying it is tricky for fund investors

Bill Gates has bought enormous tracts of farmland. Warren Buffett acquired a 400-acre Nebraska farm in the ’80s that produced corn and soybeans, reasoning that this investment in agriculture “had no downside and potentially had substantial upside.”

That logic may seem appealing. But can investors in mutual funds or exchange-traded funds follow the Gates and Buffett examples? Yes, but unless you buy cornfields or cow pastures of your own, only indirectly. No mutual fund or ETF exclusively owns land.

Instead, funds and ETFs hold the stocks of agribusiness companies, like Deere & Co. and Archer-Daniels-Midland, or buy futures contracts for commodities, like corn, soybeans and wheat.

The investment case for farmland — and thus for a fund that might proxy for it — boils down to two words: scarcity and necessity. The supply of arable land is limited — less than one-fifth of the acreage in the United States is suitable for farming — and food is essential. Unless everyone hunts and gathers, the world needs farms.

And farmland has increased in value over the long term. The U.S. Department of Agriculture says the average price of an acre of U.S. cropland has risen about 75% over the last 15 years.

Among the funds and ETFs investing exclusively in agricultural stocks, the oldest and largest is the VanEck Agribusiness ETF. It’s an indexed offering that passively owns 54 stocks in businesses ranging from farming machinery to aquaculture.

It invests worldwide, but about 60% of its holdings are in the U.S. It returned an annual average of 9.7% over the decade that ended in September.

Brandon Rakszawski, director of ETF product development for VanEck, said the ETF doesn’t aim to replicate the ownership of farmland but rather reflects the investment theme of “a growing population and the need to feed more and more people.”

Because the fund holds stocks, its movements track those of the stock market: Its returns correlate about 90% with the S&P 500. That means it would provide little additional diversification for someone who already owns lots of U.S. large-capitalization stocks.

Farmland, in contrast, is barely correlated with the stock market, according to an analysis by Todd H. Kuethe, an agricultural economist at Purdue University. So owning farm acreage could add diversification to a stock portfolio, as the land value could zig when the market zagged.

Another way a fund investor might capture some of the benefits of farmland is through a commodities ETF like the Invesco DB Agriculture Fund. That indexed offering buys commodity futures for a broad menu of farm products, as diverse as coffee and cotton. Futures are contracts that bind someone to buy or sell a commodity at an agreed-upon price and date.

Jason Bloom, Invesco’s head of fixed income and alternatives ETFs, called the fund a “reasonable proxy, though an imperfect one” for farmland ownership. Crop prices determine the value of commodities futures, creating an indirect link between the fund’s value and that of farmland, he said.

The fund lost an average of 4% a year over the last decade, though it has bounced back lately, returning 19% year to date.

Ben Johnson, director of global ETF research for Morningstar, said he wasn’t surprised that agricultural funds couldn’t really replicate the investment benefits of land ownership.

Funds and ETFs “give you exposure to a diverse basket of securities,” he said. “But are those going to be well correlated with farmlands’ values? In all likelihood not, because they’re giving you exposure to producers’ incomes, not the land they own.”

Someone willing to venture beyond funds and ETFs has other options for trying to turn dirt into dollars.

A variety of investment vehicles own farmland or help finance it. These instruments can be riskier than broad-based funds because they’re less diversified.

Several publicly traded real estate investment trusts hold farmland. Paul A. Pittman, chair and CEO of Farmland Partners, a REIT based in Denver, said global trends — the scarcity of arable land and growing food demand — make his company’s holdings valuable.

Farmland is analogous to an “inflation-linked bond,” he said. The rent paid by farmers produces a bondlike stream of cash, and those payments as well as the underlying value of the land have kept pace with inflation.

Pittman grew up in a farming family in Illinois and started buying land there while working as a lawyer and investment banker. He eventually rolled much of that property into Farmland Partners, which went public in 2014.

Today, the REIT owns more than 150,000 acres in 16 states. Its shares returned an annual average of 5.2% over the last five years.

The most straightforward way to invest in farmland may be the original one: Buy a property yourself.

Prices vary with size and location, but Kuethe said that $800,000 to $1 million might be typical. Buyers are often experienced farmers looking to expand, or people raised on or around farms.

Annie McCauley and her husband, Kirk, teamed up with close friends to buy a farm in Uniontown, Ohio, just down the road from their house. McCauley is a financial adviser with the Sequoia Financial Group in Akron. She initially saw the purchase as an investment and assumed the land would be rented to a local farmer. But McCauley, a business owner whose family has an Ohio dairy farm, wanted to operate it.